Larry's VC View is the bi-weekly blog by photonics entrepreneur and budding venture capitalist Dr. Larry Marshall who shares his thoughts and reflections on the VC scene, as he makes the transition from serial entrepreneur and engineer, to Venture Capitalist. He hopes to share his experiences, lessons and mistakes with fellow entrepreneurs seeking venture funding.

Tuesday, August 10, 2010

There is a little Aussie startup in Sydney that bootstrapped its way to north of $50M in revenue on $10,000 borrowed from the CEO’s dad--you can do this with software, really! They just scored a massive investment from Accel, not Peter Wagner whom many of you know from the telecom days but the later stage fund. You see, these guys took their first VC investment after already achieving profitability and success. An investment of $60M. Come on Aussie ;-)

This investment has caused a furor both here in the Valley, and in Australia. Every software VC I know here has been trying to invest in Atlassian since it broke out of startup mode and delivered some stellar viral growth and managed to make money at the same time--dollars instead of eyeballs, imagine that? The other fascinating thing about Atlassian is it managed to deliver a stellar employee experience in a place where there was little sharing of equity. No, they don’t have a red slide in the foyer, but they managed to re-create a lot of Silicon Valley’s karma and get their employees to invest themselves truly into their startup. Some of the younger employees don’t actually appreciate just how unique their experience is, locally.

Back to the furor. People in Australia are worried that this is another case of Australia’s best and brightest taking everything to the US, and leaving nothing behind. Local investors are asking why didn’t they get a chance to invest? After a few too many beers, the CEO let off a diatribe that at least shows his passion and commitment to his business, but was a little unkind to the local financial ecosystem and VCs ... but let’s face it, he is not alone there.

I have received emails from most of the local VCs saying they have never been pitched for money by this company, and wondering why? I’m sure that’s true; why would Atlassian want that? The company was able to bootstrap its way like most good software companies. To be sure, taking in early stage investment may have accelerated the eight years into perhaps four years, but it doesn’t look like they gave up any market lead, so trading time for equity was a fair deal--certainly they hit the market timing. Knowing VCs, if they had gotten in, there would have been sweaty palms after year three!

To raise $60M an entrepreneur certainly wouldn’t go to VCs on either side of the Pacific, it would be a growth fund like Accel’s, Sequoias’, Oak’s, or just a private equity fund. And there are a boat load of them in Australia and even more in Hong Kong, which is a lot more local than Silicon Valley. There is more than $1 trillion under management in Australia so there is no shortage of cash. Most startups in Oz would have listed on the ASX and raised their capital from mum’s and dad’s pension funds rather than professional investors. So why come here to a venture funds' growth fund?

I actually think this shows great (and sadly rare) foresight on behalf of an Aussie entrepreneur--most believe that it's just the cash that matters, not who you get it from. There is of course one other element of secret sauce in the deals, and that’s paying off the founders--to cement a private equity deal like this in a company with excellent profits, track record, and prospects of growth, you had better hope the founders believe that cash is the sincerest form of flattery. Let’s not forget, it's an entrepreneur’s job to deliver the highest value possible for the company’s stock, not to give investors a sweetheart deal.

Will Atlassian move to the US--sure, why not? In this type of web sales business it is less important where the company HQ is, but for growth, to be close to customers and market, and most importantly for exit, this is the place to be. Will the founders stay on? I hope not, after all wouldn’t it be great if they came here for a while, delivered the value they sold to Accel, and then went back to Australia to bootstrap another one? Perhaps even encourage other entrepreneurs to do the same?

It would be great if they took some local VC investment money, assuming that they could find local investors who could truly add value, maybe some former entrepreneurs who had built businesses like theirs, maybe some investment funds who had success in this space. Who knows, it might even help grow a local ecosystem. In the past 20 years, entrepreneurs from China and India have learned their trade here in the Valley, and then migrated back to replicate their success in their home countries. We need to nurture entrepreneurs, we need to create more of them, it's how economies grow--and if you want statistics--US VC-backed startups generate almost 3x Australia’s GDP. One can also argue that they are responsible for 100% of US job growth--but that’s for another time ...